Anatomy of an Asset Purchase Agreement - Part 3

Asset Purchase Agreements Demystified

About Asset Purchase Agreements

Asset Purchase Agreements are often long, complicated, and hard to understand. If you learn their common structure, it can be easier to make sense of the parts. This is the last part of a three part series about Asset Purchase Agreements (“APA”).

In our previous article, we discussed the first few sections of a typical APA:

Seller Representations & Warranties

Buyer Representations & Warranties

Covenants

This article discusses the remaining sections of the typical APA.

Conditions to Closing

This section is only included in APAs when there is a period of time between the signing and closing. It describes what each side must do in order for the other side to be obligated to complete the closing. If signing and closing are simultaneous, then this section is not needed.

If the buyer or the seller does not satisfy the “closing conditions”, then the other party can refuse to close the transaction, and possibly terminate the APA.

Examples of common closing conditions are:

getting the necessary approvals from third parties who need to consent to the sale

satisfactory buyer due diligence

the buyer getting financing for the purchase

the absence of significant adverse changes to the business between signing and closing

Indemnification

This section allocates the risk of losses between the parties. It is usually heavily negotiated and one of the most complex sections of the APA.

Typically, this section makes the seller responsible for losses that the buyer incurs as a result of:

inaccurate seller statements in the APA

unfulfilled seller promises in the APA

excluded assets or excluded liabilities

third party claims resulting from the pre-closing operations of the business

Conversely, this section typically makes the buyer responsible for losses that the seller incurs as a result of:

inaccurate buyer statements in the APA

unfulfilled buyer promises in the APA

liabilities that the buyer agrees to be responsible for

Indemnification sections often contain detailed procedures for making claims for reimbursement of losses. They can also set limits on the types of losses that are reimbursable. “Floors” and “caps” on indemnification obligations are also common.

Termination

This section describes when the buyer and seller can terminate the APA. Typical termination triggers are if the buyer or seller:

breaches the agreement and the breach is not fixed within a certain amount of time

fails to close by the closing date deadline

does not fulfill closing conditions

If the APA signing and the closing are simultaneous, then a termination section is not needed.

Miscellaneous

This section contains agreements about how to interpret the APA and how to administer the contract and transaction. Common topics covered include:

responsibility for deal expenses

addresses and procedures for notices

transferability of the agreement

changes to the agreement

governing law and dispute resolution

Readers sometimes skim over this section, but it can have important implications for the rights of the buyer and seller.

Exhibits

The APA is rarely the only document in an asset sale. These transactions commonly include ancillary documents like a bill of sale, an assignment and assumption agreement, intellectual property transfer agreements, and other side documents. These are often attached as exhibits to the APA and signed at the closing.

Conclusion

Asset Purchase Agreements are varied and often complex, but they do share common elements. There is no substitute for legal advice from an experienced acquisitions attorney. That said, you’ll get more out of the legal advice if you have a “big picture” understanding of an Asset Purchase Agreement, which will help you make sense of the parts of it.